Over the last few years, Africa has been facing many headwinds to its stellar growth rate of the last decade. Adding to all these woes is the threat that the United Kingdom votes to leave the European Union, Brexit, this Thursday. Hence, will a Brexit be a Perfect Storm to the Africa Rising story?
From 2010, the economic growth rate of China has slowed down from 10.3% to 6.9% in 2015. As a result, the demand for African commodities needed for its economic growth decreased. To make matters worse, despite having an oil glut on the world market, since November 2014, Saudi Arabia decided to ramp up its oil production; thus depressing the oil price from above $100 to a low of $26 at the beginning of 2016. As a major exporter of natural resources, the Chinese economic slowdown and Saudi Arabia ramping up its oil production have greatly affected Africa, particularly those commodity-focused economies, like Nigeria, Angola, Zambia and others. As if these were not enough, the monetary policy of the US Federal Reserve is also having a major impact on the various African economies. From the end of the quantitative easing in October 2014 to the first rate hike in December 2015 by the Federal Reserve, there has been a steady capital outflow from emerging markets, including Africa. Moreover, over the last 2 years, some of the local African currencies have been depreciating dramatically against the US dollar. For instance, the Mozambican Metical depreciated by nearly 100%; the Zambian Kwacha by 80%; the Angolan Kwanza and Nigerian Naira by 70%.
Now, the possible threat of a Brexit adds into the current picture. If ever a Brexit happens, it will have direct and indirect implications to Africa in the short to long term. Assuming that there is a Brexit vote this Thursday, there will be lots of uncertainty about the position of the United Kingdom within Europe and globally. There will be spikes in volatility within the global financial markets, that may lead to a drastic drop in the global stock market indices, as well as a deep depreciation of the British pound. Moreover, as a show of unity and to prevent further fragmentation of the European Union, the other European countries may close easy access to the European markets for goods and services, originating and coming from the United Kingdom. All these factors together may eventually pull Britain into a recession, as the International Monetary Fund has warned.
Hence, the immediate impact of a Brexit on Africa will be on goods trade. In 2014, the United Kingdom traded about $10 billion worth of goods with the sub-Saharan African region. The major trading partners of the UK in the sub-Saharan African region are South Africa, Nigeria and Kenya. Besides trade, foreign direct investment from the UK to Africa will be affected. With British and multinational companies re-assessing their situation within the UK and the European Union, investment towards the African region may be put on the back burner. Furthermore, Britain is a major aid donor to Africa, either directly or via the European Union. Having to deal with all the economic issues of a separation with the European Union as well as the economic risk of a recession, assistance to the economic development of Africa may drop drastically.
The broader aftermath of a Brexit on the European and global economy may eventually affect Africa in the medium and long term. On the one hand, although there is a slim chance of Brexit causing a major global economic and financial crisis similar to that of 2008, its impact will definitely spread within a globalised world. On the other hand, if the major central banks, like the Federal Reserve and the European Central Bank, with the international institutions, like the World Bank and IMF, are not able to contain the risks and prevent them from spreading over, Africa may face a perfect storm that may devastate its economic development over the last decade. The fragile European economy may be affected and it may sap the US economic recovery, slowing down further and even bringing the global economy into a recession. If the major trading partners of Africa are negatively influenced by Brexit, the African economies will also be eventually affected, leading to a further depreciation of the local African currencies.
However, looking at the history of the African economic development since 2000, Africa has been extremely resilient to global economic shocks, from the Asian Financial Crisis in the late 1990s, the Dotcom bubble burst in early 2000, to the more recent Global Financial Crisis in 2008. From 2000 to 2012, the sub-Saharan African region has been growing at an average of about 5.6%, above the world average of 3.9%. Although the commodity-focused African countries are currently affected, there are some bright spots within the continent. According to the World Bank and the IMF, for 2015, six out of 12 fastest growing economies in the world are in Africa – Ethiopia (8.6%), DR Congo (9.2%), Ivory Coast (7.8%), Mozambique (6.5%), Rwanda (6.9%) and Tanzania (7.2%). For 2016, the World Bank forecast these countries growing at 7.1%, 6.3%, 8.5%, 5.8%, 6.8% and 7.2% respectively.
Despite all the headwinds from the global economy, according to the IMF, the sub-Saharan African region will still grow at 3% in 2016 by and large. Therefore, unless a Brexit brings about a perfect storm to Africa, the continent will remain resilient and keep on growing slowly but surely. Like for the past economic shocks, Africa may eventually overcome adversity and the Africa Rising story will continue.
The author is a partner at Steel Advisory Partners in Singapore. This article was written specifically for the NTU-SBF Centre for African Studies.